Company Question of The Day: How Does HPQ Pop 50%?

Below I have included our head of Technology’s (Rebecca Runkle) note on Hewlett Packard (HPQ). We went through this on our 830AM morning client call. If you’d like access to this call, please email Jen White Kane at

Rebecca continues to be bearish on HPQ – their blowup last week reinforced most of what she has been saying for the past 6 weeks.

If you are looking for levels to trade HPQ, it will finally be oversold at the $29.37 line – I would cover shorts there, and re-short all strength associated with these Barron’s type calls up to what has turned into to a formidable intermediate term Trend line up at $34.94/share. This stock remains over-owned based on expectations that we see as unreasonably optimistic.

Keith R. McCullough
CEO & Chief Investment Officer
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Question of the Day: “How Does HPQ Pop 50%?”

In December, Mark Veverka of Barron’s wrote a cover article on Hewlett Packard entitled “Picture of Health”. In it, he opines on Mark Hurd’s leadership skills, HPQ’s defensive positioning and ability to gain share as well as HPQ’s track record for not lowering earnings (in stark contrast to other tech titans). The stock was at $35.

This weekend, we were treated to “How HP Could Pop 50%”. Now that’s an attention getter if I ever saw one. Despite a miss and downward revisions, Veverka continues to like HPQ “over time” and he remains enamored with “Hurd’s operations acumen and proven ability to deliver strong profit margins in the face of adversity”. He claims his HP thesis remains intact and that it was never about revenues in the first place.

Going into the quarter, my HPQ thesis was largely driven by a belief that while HPQ is an impressive cost-cutting story, revenues do matter and revenue expectations (along with earnings and cash flow forecasts) remained too high. There was a level of investor complacency related to HPQ that I just didn’t and still don’t get. Indeed, HPQ missed revenue targets and built inventory on its books and in the channel. This quarter – revenue headwinds remain and now margins will likely suffer as working capital is “fixed”. While there is no doubt that Mark Hurd is one of the most talented executives in technology and that HPPMA (Hewlett-Packard Post Mark’s Arrival) is a much stronger franchise than before – it is not immune to secular and cyclical challenges.

Longer term, I worry about the printing franchise. During HPQ’s investor call, CFO Cathie Lesjak detailed HPQ’s printing results and both Hurd and Lesjak pointed to a correlation between GDP, unemployment and printing demand. When people aren’t working; they print less. Fair, but that’s not the entire picture.
There are secular forces at work too and anyone who thinks printing will return lockstep with the economy is looking at past correlation models and not the New Printing Reality. What is this New Reality? Just take a step back and think about what’s changed and what’s changing. Younger people, who grew up on computers and never really learned to print, are entering the workforce. Our computer screens are higher resolution and larger than they were – even 2 years ago. Behaviorally, we are adapting and don’t feel the need to print as much as before. Wireless technology has penetrated the print environment and while it feels great to get rid of cables – I have yet to rid myself of that laziness factor. If my printer is in the other room and I am comfy on my couch – I think twice about hitting Alt-F, P. This is especially true as I increasingly worry about the environment and “being green”. Technologies are changing beyond the consumer as well – be it Amazon’s Kindle or electronic bus-stop posters – books and advertising are quickly moving to digital form.

Ironically, HPQ is increasing supplies prices in this environment. Perhaps the end-user really is stupid and/or inelastic. But in this economy, with viable third-party alternatives, HPQ runs the risk of pushing those who are still printing into the arms of others (be it competitors or third-party supplies manufacturers). Regardless, I am less inclined to give HPQ the benefit of the doubt then others. When the economy recovers, I doubt print will recover in similar fashion. If I am right, 50% from here (and a return to early 08 multiples) isn’t a slam dunk anytime soon.

PS - FWIW, Hurd sits on News Corp’s board and Barron’s is owned by News Corp.

Rebecca Runkle
Managing Director
Research Edge LLC